- The Washington Times - Saturday, January 17, 2009

The Treasury Department moved Friday to quell a renewed crisis among the nation’s biggest banks with a third cash infusion for Bank of America, but the mounting problems with bad loans raised concerns about whether the government’s bailout program is working.

The $20 billion cash infusion that Treasury provided to the Charlotte, N.C., giant in the middle of the night brought its total government aid to $45 billion, the same as Citigroup received last fall, though the New York bank continued to falter amid astounding losses that forced it Friday to announce a major reordering of the company.

Citigroup, the nation’s largest bank before its downsizing this week left Bank of America in the top spot, reported a fourth-quarter loss of $8 billion and recorded $28 billion of write-downs and credit losses, bringing its total losses over the past 15 months to $92 billion.

Meanwhile, Merrill Lynch, which is being taken over by Bank of America, posted a record $15 billion loss in the fourth quarter, while Bank of America reported a $1.8 billion loss that was its first in 17 years. The Treasury infusion was aimed at helping the Charlotte bank absorb Merrill’s huge losses from bad loans, and the government also agreed to share losses on $118 billion of those loans.

Still, even rumors of the additional assistance Treasury was marshaling failed to prevent a major run on the banks’ stocks that drove an index of banking stocks to new lows Thursday. The run on the nation’s two top banks resembled the kind of downward spiral that led to the failure or takeover of other financial titans last year, including Lehman Brothers, Bear Stearns, Wachovia and Washington Mutual.

“The survival of banks has yet again become the foremost issue for financial markets. There has been a rout in bank shares over the past few days, especially in the U.S.” as Citigroup’s and Bank of America’s woes came to light, said David Woo, analyst at Barclays Bank, a major London bank that is also engulfed in a fight to overcome big credit losses.

Although the stock market overall enjoyed a modest rally after the latest bailout move was announced Friday, the two bank stocks declined further. Bank of America shares tumbled 13.7 percent to $7.18, while Citi shares fell 8.6 percent to $3.50. Mr. Woo questioned whether the latest government relief will last any longer than that provided by previous Treasury actions.

“Investors are likely to increasingly question the effectiveness of government capital injections in supporting banks, given the experience of the past few months,” he said. “As long as bad assets stay on bank balance sheets and credit markets remain clogged, it is difficult to see a sustainable recovery in bank stocks anytime soon. And this in turn will keep it very difficult for banks to lend to consumers and businesses.”

Treasury Secretary Henry M. Paulson Jr. defended his use of most of the first $350 billion of bailout funds to provide capital to banks, and said the lion’s share of the second installment, which will be managed by the incoming Obama administration, will have to be used much the same way.

“I will assure you that the [rescue program] has been absolutely essential to financial stability, and financial stability is essential to everything that everyone wants to see happen economically,” he told reporters at the Treasury. “I have always said that stability is our first priority, then recovery, then repair.”

Mr. Paulson conceded, however, that the lingering problem with toxic loan portfolios — which the program originally was designed to address through government purchases of troubled assets — remains a dark cloud hanging over banks, particularly the largest ones.

He said the Bush administration had explored the possibility of establishing a new government-backed bank that would be used to remove bad loans and other toxic assets from commercial banks’ balance sheets. Federal Reserve Chairman Ben S. Bernanke and other Fed officials also suggested this week that might be a solution, and many on Wall Street agree.

“There is a lot of work that has been done on the aggregator bank,” Mr. Paulson said, using the term for a government-sponsored bank that would take over bad loan assets to take them off banks’ balance sheets. Mr. Paulson did not endorse the idea or recommend it to the incoming administration. Mr. Obama and his advisers have been mostly silent on the idea.

Former Federal Reserve Chairman Paul Volcker, Mr. Obama’s choice to head a new White House economic advisory board, has suggested setting up an agency modeled after the Resolution Trust Corp. (RTC), which disposed of the bad assets of failed thrifts during the 1980s savings and loan crisis.

“This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating,” he said in a September commentary. “Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management.”

Brian Gardner, Washington analyst at Keefe, Bruyette & Woods, said the second half of the bailout fund is likely to be used that way.

“We expect that a troubled-purchase program will be used in coming weeks, and the Obama administration and Congress might also try to set up an RTC-style agency to buy those bad assets and sell them to the public over time,” he said. “The use of a good bank/bad bank model to resolve some troubled banks is, in our opinion, also under consideration.”

Citigroup appeared to be moving in that direction Friday when it announced that it is dividing its business in two. One part will encompass Citigroup’s profitable banking and brokerage businesses that remain viable; the other includes money-losing and riskier businesses like its struggling wealth management division and an $850 billion portfolio of bad loans, including $300 billion that are partially guaranteed by the federal government.

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